REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Stockholders
of uSell.com, Inc. and Subsidiaries
We have audited the accompanying consolidated
balance sheets of uSell.com, Inc. and Subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related
consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of uSell.com, Inc. and
Subsidiaries, as of December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum LLP
West Palm Beach, FL
March 30, 2017
uSell.com, Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,657,422
|
|
|
$
|
1,047,786
|
|
Restricted cash
|
|
|
982,064
|
|
|
|
801,230
|
|
Accounts receivable, net
|
|
|
430,171
|
|
|
|
463,187
|
|
Inventory
|
|
|
8,874,099
|
|
|
|
7,099,970
|
|
Prepaid expenses and other current assets
|
|
|
130,141
|
|
|
|
297,023
|
|
Total Current Assets
|
|
|
12,073,897
|
|
|
|
9,709,196
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
191,957
|
|
|
|
193,243
|
|
Goodwill
|
|
|
8,448,759
|
|
|
|
8,406,561
|
|
Intangible assets, net
|
|
|
3,724,466
|
|
|
|
5,043,972
|
|
Capitalized technology, net
|
|
|
934,193
|
|
|
|
886,543
|
|
Other assets
|
|
|
124,358
|
|
|
|
79,145
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
25,497,630
|
|
|
$
|
24,318,660
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,328,422
|
|
|
$
|
2,563,598
|
|
Accrued expenses
|
|
|
916,961
|
|
|
|
729,160
|
|
Deferred revenue
|
|
|
374,098
|
|
|
|
814,295
|
|
Promissory note payable
|
|
|
673,332
|
|
|
|
-
|
|
Capital lease obligation
|
|
|
10,664
|
|
|
|
-
|
|
Lease termination payable
|
|
|
-
|
|
|
|
5,000
|
|
Total Current Liabilities
|
|
|
6,303,477
|
|
|
|
4,112,053
|
|
|
|
|
|
|
|
|
|
|
Promissory note payable, net of current portion
|
|
|
6,441,000
|
|
|
|
5,087,043
|
|
Capital lease obligation, net of current portion
|
|
|
47,986
|
|
|
|
-
|
|
Placement rights derivative liability
|
|
|
-
|
|
|
|
1,130,000
|
|
Total Liabilities
|
|
|
12,792,463
|
|
|
|
10,329,096
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Convertible Series A preferred stock; $0.0001 par value; 325,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Convertible Series B preferred stock; $0.0001 value per share; 4,000,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Convertible Series C preferred stock; $0.0001 value per share; 146,667 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Convertible Series E preferred stock; $0.0001 value per share; 103,232 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock; $0.0001 par value; 43,333,333 shares authorized; 20,134,999 shares and 19,751,999 shares issued and outstanding, respectively
|
|
|
2,013
|
|
|
|
1,976
|
|
Additional paid in capital
|
|
|
71,089,882
|
|
|
|
68,662,578
|
|
Accumulated deficit
|
|
|
(58,386,728
|
)
|
|
|
(54,674,990
|
)
|
Total Stockholders' Equity
|
|
|
12,705,167
|
|
|
|
13,989,564
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
25,497,630
|
|
|
$
|
24,318,660
|
|
See accompanying notes to consolidated financial
statements.
uSell.com, Inc. and Subsidiaries
Consolidated Statements of Operations
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
94,656,735
|
|
|
$
|
27,093,928
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue
|
|
|
88,834,912
|
|
|
|
23,549,098
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
5,821,823
|
|
|
|
3,544,830
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,680,364
|
|
|
|
2,037,371
|
|
General and administrative
|
|
|
5,986,273
|
|
|
|
6,344,539
|
|
Total operating expenses
|
|
|
7,666,637
|
|
|
|
8,381,910
|
|
Loss from Operations
|
|
|
(1,844,814
|
)
|
|
|
(4,837,080
|
)
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
429
|
|
|
|
956
|
|
Interest expense
|
|
|
(1,497,353
|
)
|
|
|
(189,245
|
)
|
Change in fair value of placement rights derivative liability
|
|
|
(370,000
|
)
|
|
|
-
|
|
Total Other Expense, Net
|
|
|
(1,866,924
|
)
|
|
|
(188,289
|
)
|
|
|
|
|
|
|
|
|
|
Loss before Income Tax Benefit
|
|
|
(3,711,738
|
)
|
|
|
(5,025,369
|
)
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit
|
|
|
-
|
|
|
|
2,392,994
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(3,711,738
|
)
|
|
$
|
(2,632,375
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the period - basic and diluted
|
|
|
20,029,701
|
|
|
|
9,687,951
|
|
See accompanying notes to consolidated financial
statements.
uSell.com, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders'
Equity
Years Ended December 31, 2016 and 2015
|
|
Series A Preferred
Stock,
$0.0001 Par Value
|
|
|
Series B Preferred
Stock,
$0.0001 Par Value
|
|
|
Series C Preferred
Stock,
$0.0001 Par Value
|
|
|
Series E Preferred
Stock,
$0.0001 Par Value
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Balance, January 1, 2015
|
|
|
100,000
|
|
|
$
|
10
|
|
|
|
951,250
|
|
|
$
|
95
|
|
|
|
146,667
|
|
|
$
|
15
|
|
|
|
103,232
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series A Preferred Stock to Common Stock
|
|
|
(100,000
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B Preferred Stock to Common Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(951,250
|
)
|
|
|
(95
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series C Preferred Stock to Common Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(146,667
|
)
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series E Preferred Stock to Common Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(103,232
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock in connection with We Sell Cellular acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock in connection with Note Purchase Agreement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with Note Purchase Agreement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Derivative Liability upon Elimination of Placement Rights
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
See accompanying notes to consolidated financial
statements.
uSell.com, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders'
Equity
Years Ended December 31, 2016 and 2015
(Continued)
|
|
Common Stock,
$0.0001 Par Value
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid in Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance, January 1, 2015
|
|
|
7,533,817
|
|
|
$
|
753
|
|
|
$
|
54,610,843
|
|
|
$
|
(52,042,615
|
)
|
|
$
|
2,569,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series A Preferred Stock to Common Stock
|
|
|
100,000
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B Preferred Stock to Common Stock
|
|
|
60,411
|
|
|
|
6
|
|
|
|
89
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series C Preferred Stock to Common Stock
|
|
|
146,667
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series E Preferred Stock to Common Stock
|
|
|
103,232
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock in connection with We Sell Cellular acquisition
|
|
|
9,358,837
|
|
|
|
936
|
|
|
|
10,387,373
|
|
|
|
-
|
|
|
|
10,388,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock in connection with Note Purchase Agreement
|
|
|
860,000
|
|
|
|
86
|
|
|
|
725,714
|
|
|
|
-
|
|
|
|
725,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
1,589,035
|
|
|
|
160
|
|
|
|
2,938,559
|
|
|
|
-
|
|
|
|
2,938,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,632,375
|
)
|
|
|
(2,632,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
19,751,999
|
|
|
$
|
1,976
|
|
|
$
|
68,662,578
|
|
|
$
|
(54,674,990
|
)
|
|
$
|
13,989,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with Note Purchase Agreement
|
|
|
350,000
|
|
|
|
35
|
|
|
|
402,465
|
|
|
|
-
|
|
|
|
402,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Derivative Liability upon Elimination of Placement Rights
|
|
|
-
|
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
33,000
|
|
|
|
2
|
|
|
|
524,839
|
|
|
|
-
|
|
|
|
524,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,711,738
|
)
|
|
|
(3,711,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
20,134,999
|
|
|
$
|
2,013
|
|
|
$
|
71,089,882
|
|
|
$
|
(58,386,728
|
)
|
|
$
|
12,705,167
|
|
See accompanying notes to consolidated financial
statements.
uSell.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,711,738
|
)
|
|
$
|
(2,632,375
|
)
|
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,912,077
|
|
|
|
819,604
|
|
(Recovery of) Provision for bad debt expense
|
|
|
(1,876
|
)
|
|
|
5,432
|
|
Stock based compensation expense
|
|
|
524,841
|
|
|
|
2,953,969
|
|
Deferred tax benefit
|
|
|
-
|
|
|
|
(2,392,994
|
)
|
Amortization of debt issue costs into interest expense
|
|
|
479,340
|
|
|
|
51,564
|
|
Loss on disposal of property and equipment
|
|
|
112,284
|
|
|
|
-
|
|
Change in fair value of placement rights derivative liability
|
|
|
370,000
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
34,892
|
|
|
|
(76,205
|
)
|
Inventory
|
|
|
(1,816,327
|
)
|
|
|
(3,718,347
|
)
|
Prepaid and other current assets
|
|
|
166,882
|
|
|
|
669,565
|
|
Other assets
|
|
|
13,222
|
|
|
|
(26,750
|
)
|
Accounts payable
|
|
|
1,764,824
|
|
|
|
727,466
|
|
Accrued expenses
|
|
|
187,801
|
|
|
|
(173,297
|
)
|
Lease termination payable
|
|
|
(5,000
|
)
|
|
|
(10,000
|
)
|
Deferred revenues
|
|
|
(440,197
|
)
|
|
|
459,400
|
|
Net Cash and Cash Equivalents Used In Operating Activities
|
|
|
(408,975
|
)
|
|
|
(3,342,968
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Website development costs
|
|
|
(595,528
|
)
|
|
|
(601,404
|
)
|
Cash paid for acquisition, net of cash acquired
|
|
|
-
|
|
|
|
(2,365,859
|
)
|
Restricted cash
|
|
|
(180,834
|
)
|
|
|
(801,230
|
)
|
Cash paid to purchase property and equipment
|
|
|
(93,686
|
)
|
|
|
(16,789
|
)
|
Security deposits
|
|
|
(8,435
|
)
|
|
|
-
|
|
Net Cash and Cash Equivalents Used In Investing Activities
|
|
|
(878,483
|
)
|
|
|
(3,785,282
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
|
2,000,000
|
|
|
|
6,000,000
|
|
Payment of capital lease obligations
|
|
|
(3,355
|
)
|
|
|
-
|
|
Cash paid for debt issue costs
|
|
|
(99,551
|
)
|
|
|
(238,721
|
)
|
Net Cash and Cash Equivalents Provided By Financing Activities
|
|
|
1,897,094
|
|
|
|
5,761,279
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
609,636
|
|
|
|
(1,366,971
|
)
|
Cash and Cash Equivalents - Beginning of Period
|
|
|
1,047,786
|
|
|
|
2,414,757
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - End of Period
|
|
$
|
1,657,422
|
|
|
$
|
1,047,786
|
|
uSell.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Continued)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
SUPPLEMENTARY CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash Paid During the Period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,018,529
|
|
|
$
|
136,858
|
|
Taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to goodwill for inventory valuation
|
|
$
|
42,198
|
|
|
$
|
-
|
|
Elimination of Placement Rights Derivative Liability
|
|
$
|
1,500,000
|
|
|
$
|
-
|
|
Purchases of property and equipment through capital leases
|
|
$
|
62,005
|
|
|
$
|
-
|
|
Common stock issued in connection with note payable
|
|
$
|
402,500
|
|
|
$
|
725,800
|
|
Common stock issued in connection with We Sell Cellular Acquisition
|
|
$
|
-
|
|
|
$
|
10,388,309
|
|
Fair value of Placement Rights in connection with We Sell Cellular acquisition
|
|
$
|
-
|
|
|
$
|
1,130,000
|
|
Common stock issued for services
|
|
$
|
-
|
|
|
$
|
4,450
|
|
Conversion of Series A preferred stock into common stock
|
|
$
|
-
|
|
|
$
|
10
|
|
Conversion of Series B preferred stock into common stock
|
|
$
|
-
|
|
|
$
|
95
|
|
Conversion of Series C preferred stock into common stock
|
|
$
|
-
|
|
|
$
|
15
|
|
Conversion of Series E preferred stock into common stock
|
|
$
|
-
|
|
|
$
|
10
|
|
See accompanying notes to consolidated financial
statements.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1 - Organization and Business
uSell.com, Inc., through
its wholly-owned subsidiaries (collectively, “uSell,” or the “Company”), is a technology driven company
focused on extracting the maximum value from used mobile devices, at large scale. uSell acquires products from both individual
consumers, on its website, uSell.com, and from major carriers, big box retailers, and manufacturers through its subsidiary, We
Sell Cellular, LLC (“We Sell Cellular”). These devices are then distributed globally, leveraging both a traditional
sales force and an online marketplace where professional buyers of used smartphones compete to buy inventory in an on-demand fashion.
Through participation on uSell’s marketplace platforms and through interaction with uSell’s salesforce, buyers can
acquire high volumes of inventory in a cost effective manner, while minimizing risk.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”).
Principals of Consolidation
The accompanying consolidated
financial statements include the accounts of uSell and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The operating results for We Sell Cellular are included in the consolidated
financial statements from the effective date of acquisition of October 26, 2015.
Segment Information
Operating segments are
identified as components of an enterprise about which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance.
The Company’s chief operating decision maker is its Chief Executive Officer. The Company and its Chief Executive Officer
view the Company’s operations and manage its business as one operating segment.
Use of Estimates
The preparation of consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
Making estimates requires
management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition,
situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered
in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual
results could differ significantly from these estimates.
Cash and Cash Equivalents
All highly liquid investments
with an original maturity of 90 days or less when purchased are considered to be cash equivalents. Cash equivalents are stated
at cost, which approximates market value. Cash equivalents generally consist of money market accounts.
Accounts Receivable
Accounts receivable represent
obligations from the Company’s customers and are recorded net of allowances for cash discounts, doubtful accounts, and sales
returns. The Company’s policy is to reserve for uncollectible accounts based on its best estimate of the amount of probable
credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether
an allowance for doubtful accounts is necessary based on an analysis of past due accounts and other factors that may indicate that
the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all
means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts
was $1,600 and $14,300 at December 31, 2016 and 2015 respectively.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Inventory, net
Inventory, comprised of
all finished goods, is stated at the lower of cost (average cost method) or market. Inventory is recorded net of allowances.
Allowances for slow-moving
or obsolete inventory are provided based on historical experience of a variety of factors, including sales volume, product life
and levels of inventory at the end of the period. The allowance for slow-moving or obsolete inventory amounted to $115,000 and
$0 at December 31, 2016 and 2015, respectively.
Substantially all of the
Company’s inventory purchases are paid for before inventory is received in the Company’s warehouse. Prepaid inventory
amounted to approximately $221,000 and $133,000 at December 31, 2016 and 2015, respectively, and is included in inventory, net
in the accompanying consolidated balance sheets.
Property and Equipment
Property and equipment
represent costs associated with leasehold improvements, software, and computer and office equipment. Property and equipment is
stated at cost less accumulated depreciation and amortization. Depreciation on property and equipment is calculated on the straight-line
basis over the estimated useful lives of the related assets, which typically range from three to five years. Leasehold improvements
are amortized over the shorter of the estimated useful lives or the remaining lease term. Maintenance and repairs are expensed
as incurred; expenditures that enhance the value of property or extend their useful lives are capitalized. When assets are sold
or returned, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included
in income.
Capitalized Technology Costs
In accordance with Accounting
Standards Codification (“ASC”) 350-40, Internal-Use Software, the Company capitalizes certain external and internal
computer software costs incurred during the application development stage. The application development stage generally includes
software design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed as
incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality.
Capitalized technology costs are amortized over the estimated useful lives of the software assets on a straight-line basis, generally
not exceeding three years.
Business Combinations
ASC 805, Business Combinations
(“ASC 805”), applies the acquisition method of accounting for business combinations to all acquisitions where the acquirer
gains a controlling interest, regardless of whether consideration was exchanged. ASC 805 establishes principles and requirements
for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination
or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. Accounting for acquisitions requires the Company to recognize,
separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of
the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of
the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately value
assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.
As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments
to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement
period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments
are recorded to the consolidated statements of comprehensive loss.
Goodwill and Intangible
Assets
The Company accounts for
goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). ASC
350 requires that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim
basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Goodwill is tested for
impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (December
31 for the Company) and between annual tests if an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying value. In evaluating goodwill for impairment, the Company has the option
to first assess qualitative factors to determine whether further impairment testing is necessary. Among other relevant events and
circumstances that affect the fair value of reporting units, the Company considers individual factors such as macroeconomic conditions,
changes in the Company’s industry and the markets in which the Company operates, as well as the Company’s historical
and expected future financial performance. If the Company concludes that it is more likely than not that a reporting unit's fair
value is less than its carrying value, recoverability of goodwill is evaluated using a two-step process. The first step involves
a comparison of the fair value of each of reporting unit with its carrying amount. If a reporting unit’s carrying amount
exceeds its fair value, the second step is performed. The second step involves a comparison of the implied fair value and carrying
value of that reporting unit’s goodwill. To the extent that a reporting unit’s carrying amount exceeds the implied
fair value of its goodwill, an impairment loss is recognized.
The valuation of fair value
for reporting units is determined based on a discounted future cash flow model that uses six years of projected cash flows and
a terminal value based on growth assumptions. Rates used to discount cash flows are dependent upon interest rates and the cost
of capital based on the Company’s industry and capital structure, adjusted for equity and size risk premiums based on market
capitalization. Estimates of future cash flows are dependent on the Company’s knowledge and experience about past and current
events and assumptions about conditions expected to exist, including long-term growth rates, capital requirements and useful lives.
The Company’s estimates of cash flows are also based on historical and future operating performance, economic conditions
and actions the Company expects to take.
In making its assessments
of fair value, the Company relies on its knowledge and experience about past and current events and assumptions about conditions
expected to exist in the future. These assumptions are based on a number of factors, including future operating performance, economic
conditions, actions the Company expects to take and present value techniques. There are inherent uncertainties related to these
factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions
underlying the impairment analysis will change in such a manner that impairment in value may occur in the future. There was no
impairment of goodwill as of December 31, 2016 and 2015.
Intangible assets represent
customer relationships and trade names/trademarks related to We Sell Cellular. Finite lived assets are amortized on a straight-line
basis over the estimated useful lives of the assets. Indefinite lived intangible assets are not amortized, but instead are subject
to annual impairment evaluation.
The Company periodically
reviews the carrying values of its intangible assets and other long-lived assets when events or changes in circumstances indicate
that it is more likely than not that their carrying values may exceed their fair values, and records an impairment charge when
considered necessary. When circumstances indicate that an impairment of value may have occurred, the Company tests such assets
for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of such assets and
their eventual disposition to their carrying amounts. If the undiscounted future cash flows are less than the carrying amount of
the asset, an impairment loss, measured as the excess of the carrying amount of the asset over its estimated fair value, is recognized.
The cash flow estimates used in such calculations are based on estimates and assumptions, using all available information that
management believes is reasonable. Fair value, for purposes of calculating impairment, is measured based on estimated future cash
flows, discounted at a market rate of interest. During the years ended December 31, 2016 and 2015, the Company noted no indicators
of impairment.
Debt Issue Costs
Debt issuance costs incurred in connection with
the Company’s debt are capitalized and amortized as interest expense over the term of the related debt. In accordance with
Accounting Standards Update (“ASU”) No. 2015-03, “Interest—Imputation of Interest,” the Company presents
debt issuance costs as a reduction from the carrying amount of debt.
Convertible Instruments
The Company reviews all
of its convertible instruments for the existence of an embedded conversion feature which may require bifurcation, if certain criteria
are met. These criteria include circumstances in which:
|
a)
|
The economic characteristics and risks of the embedded derivative instrument are not clearly and
closely related to the economic characteristics and risks of the host contract,
|
|
b)
|
The hybrid instrument that embodies both the embedded derivative instrument and the host contract
is not remeasured at fair value under otherwise applicable GAAP with changes in fair value reported in earnings as they occur,
and
|
|
c)
|
A separate instrument with the same terms as the embedded derivative instrument would be considered
a derivative instrument subject to certain requirements (except for when the host instrument is deemed to be conventional).
|
A bifurcated derivative
financial instrument may be required to be recorded at fair value and adjusted to market at each reporting period end date. In
addition, the Company may be required to classify certain stock equivalents issued in connection with the underlying debt instrument
as derivative liabilities.
For convertible instruments
that the Company has determined should not be bifurcated from their host instruments, the Company records discounts to convertible
notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value
of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the
note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption.
Also when necessary, the Company records deemed dividends for the intrinsic value of conversion options embedded in preferred shares
based upon the differences between the fair value of the underlying common stock at the commitment date of the financing transaction
and the effective conversion price embedded in the preferred shares.
Finally, if necessary,
the Company will determine the existence of liquidated damage provisions. Liquidated damage provisions are not marked to market,
but evaluated based upon the probability that a related liability should be recorded.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Common Stock Purchase Warrants and Derivative
Financial Instruments
The Company reviews any
common stock purchase warrants and other freestanding derivative financial instruments at each balance sheet date and classifies
them on the consolidated balance sheet as:
|
a)
|
Equity if they (i) require physical settlement or net-share settlement, or (ii) gives the Company
a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement), or
|
|
b)
|
Assets or liabilities if they (i) require net-cash settlement (including a requirement to net cash
settle the contract if an event occurs and if that event is outside the Company’s control), or (ii) give the counterparty
a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
|
The Company assesses classification
of its common stock purchase warrants and other freestanding derivatives at each reporting date to determine whether a change in
classification between assets and liabilities is required. The Company determined that its outstanding common stock purchase warrants
satisfied the criteria for classification as equity instruments at December 31, 2016 and 2015. The Company also determined that
the Placement Rights satisfied the criteria for classification as derivative financial instruments at December 31, 2015 (see Note
3).
Contingent Consideration
The Company recognizes
the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree
or assets of the acquiree in a business combination. The contingent consideration is classified as either a liability or equity
in accordance with ASC 480-10, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity.” If classified as a liability, the liability is remeasured to fair value at each subsequent reporting date until
the contingency is resolved. Increases in fair value are recorded as losses, while decreases are recorded as gains. If classified
as equity, contingent consideration is not remeasured and subsequent settlement is accounted for within equity.
Revenue Recognition
Revenue is recognized when all of the following
conditions exist: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the sales price is fixed or
determinable, and (4) collectability is reasonably assured.
Principal Device Revenue
The Company, through We
Sell Cellular, generates revenue from the sales of its cellular telephones and related equipment. The Company recognizes revenue
“FOB shipping point” on such sales. Delivery to the customer is deemed to have occurred when the customer takes title
to the product. Generally, title passes to the customer when the products leave the Company’s warehouse. Payment terms generally
require payment once an order is placed. The Company allows customers to return product within 30 days of shipment if the product
is defective. Allowances for product returns are recorded as a reduction of sales at the time revenue is recognized based on historical
data. The estimate of the allowance for product returns amounted to approximately $130,000 and $197,000 at December 31, 2016 and
2015, respectively, and is recorded in accrued expenses in the accompanying consolidated balance sheets.
Under the Company’s
“Managed by uSell” service on uSell.com, the Company partnered with a third party logistics company to inspect, wipe
and process devices before passing them along to buyers. Under this model, title to a device passes to uSell upon issuance of payment
to the seller, which is generally within one to two days from the receipt of the device at the third party warehouse. Title to
a device is then transferred to the buyer upon shipment to the buyer.
Agent Commission Revenue
In certain cases, sellers
on the Company’s uSell.com website are shown a larger list of offers directly from third party buyers interested in purchasing
their devices. These offers are shown instead of or in addition to the “Managed by uSell” offer. If a seller chooses
one of these offers, the seller will ship their device directly to the buyer, rather than to the Company’s third party warehouse.
The buyer is then responsible for testing the device, servicing the customer, and ultimately paying the seller for the device or
returning it. The Company charges a commission to the buyers only when the seller sends in a device and is successfully paid for
it. As such, the Company recognizes Agent Commission Revenue upon payment to the seller.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Fulfillment Revenue
The Company offers fulfillment
services on behalf of its buyers for the items sold using the Agent Commission Revenue approach outlined above. The Company acts
as the agent in these fulfillment services transactions, passing orders booked by its buyers to its third party fulfillment vendor,
who then assembles the kits and mails them directly to the sellers. The Company earns a standard fee from its buyers and recognizes
revenue upon shipment of the kits to the sellers. The Company evaluated the presentation of revenue on a gross versus net basis
and determined that since the Company performs as an agent without assuming the risks and rewards of ownership of the goods, revenue
should be reported on a net basis.
Advertising Revenue
Advertising revenues primarily
come from payments for text-based sponsored links and display advertisements. Generally, the Company’s advertisers pay the
Company on a cost per click, or CPC basis, which means advertisers pay only when someone clicks on one of their advertisements,
or on a cost per thousand impression basis, or CPM. Paying on a CPM basis means that advertisers pay the Company based on the number
of times their advertisements appear on the Company’s websites or mobile applications. Advertising revenue is recognized
as income when the advertising services are rendered.
Deferred revenue represents
amounts billed to customers or payments received from customers prior to providing services and for which the related revenue recognition
criteria have not been met.
Shipping and Handling
Costs
The Company follows the
provisions of ASC Topic 605-45 regarding shipping and handling costs. Shipping and handling costs included in cost of revenue were
approximately $519,000 and $116,000 for the years ended December 31, 2016 and 2015, respectively.
Advertising
Advertising costs are expensed as they are incurred
and are included in sales and marketing expenses. Advertising expense amounted to approximately $50,000 and $1,324,000 for the
years ended December 31, 2016 and 2015, respectively.
Share-Based Payment Arrangements
The Company accounts for
stock options in accordance with ASC 718, “Compensation - Stock Compensation.” ASC 718 requires generally that all
equity awards be accounted for at their “fair value.” This fair value is measured on the grant date for stock-settled
awards, and at subsequent exercise or settlement for cash-settled awards. Fair value is equal to the underlying value of the stock
for “full-value” awards such as restricted stock and performance shares, and is estimated using an option-pricing model
with traditional inputs for “appreciation” awards such as stock options and stock appreciation rights.
Costs equal to these fair
values are recognized ratably over the requisite service period based on the number of awards that are expected to vest, or in
the period of grant for awards that vest immediately and have no future service condition. For awards that vest over time, cumulative
adjustments in later periods are recorded to the extent actual forfeitures differ from the Company’s initial estimates: previously
recognized compensation cost is reversed if the service or performance conditions are not satisfied and the award is forfeited.
The expense resulting from share-based payments is recorded in general and administrative expense in the accompanying consolidated
statements of operations.
Subsequent modifications
to outstanding awards result in incremental cost if the fair value is increased as a result of the modification. Thus, a value-for-value
stock option repricing or exchange of awards in conjunction with an equity restructuring does not result in additional compensation
cost.
Income Taxes
The Company complies with
the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach
to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts,
based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
ASC Topic 740 prescribes
a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken
or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be
sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of December 31, 2016. The Company
is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from
its position.
The Company may be subject
to potential income tax examinations by federal or state authorities. These potential examinations may include questioning the
timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and state tax
laws. Management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve
months.
The Company’s policy
for recording interest and penalties associated with audits is to record such expense as a component of income tax expense. There
were no amounts accrued for penalties or interest as of December 31, 2016.
Concentration of Credit
Risk
Financial instruments that
potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable.
The Company minimizes credit
risk associated with cash by periodically evaluating the credit quality of its primary financial institutions. At times, the Company’s
cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance
limit. At December 31, 2016 and 2015, the Company had not experienced losses on these accounts and management believes the Company
is not exposed to significant risks on such accounts.
Concentrations of credit
risk with respect to accounts receivables is minimal due to the large number of customers comprising the Company’s customer
base and generally short payment terms.
Fair Value of Financial
Instruments
Financial instruments,
including cash, accounts receivable, accounts payable and accrued expenses are carried at cost, which management believes approximates
fair value due to the short-term nature of these instruments. The fair value of debt approximates its carrying amounts as a market
rate of interest is attached to the repayment.
Net Loss per Share
Basic loss per share (“EPS”)
is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during
the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of
shares of common stock outstanding during the period, including stock options and warrants, using the treasury stock method, and
convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of
shares of common stock if their effect is anti-dilutive.
The computation of diluted
EPS excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Unvested Restricted Stock
|
|
|
226,666
|
|
|
|
356,662
|
|
Unvested Restricted Stock Units
|
|
|
743,020
|
|
|
|
475,000
|
|
Stock Warrants
|
|
|
801,250
|
|
|
|
802,520
|
|
Stock Options
|
|
|
434,998
|
|
|
|
575,685
|
|
|
|
|
2,205,934
|
|
|
|
2,209,867
|
|
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Recent
Accounting Pronouncements
In May 2014, the Financial
Accounting Standard Board (the “FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers”
(“ASU 2014-09”). ASU 2014-09 provides guidance for revenue recognition and affects any entity that either enters into
contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes
the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. The
core principle of ASU 2014-09 is the recognition of revenue when a company transfers promised goods or services to customers in
an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services.
ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, companies will need to use more judgment
and make more estimates than under the current guidance. These may include identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each
separate performance obligation. ASU 2014-09 was initially effective for fiscal years beginning after December 15, 2016 and interim
periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application
of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach
with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote
disclosures). Early adoption is not permitted. The Company will adopt the standard on January 1, 2018, using the full retrospective
transition method, which may result in a cumulative-effect adjustment for deferred revenue to the opening balance sheet for 2016
and the restatement of the financial statements for all prior periods presented. The Company continues to evaluate the impact of
adoption of this standard on its consolidated financial statements and disclosures.
In July 2015, the FASB
issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” simplifying the measurement of inventory
.
The guidance requires an entity to measure inventory at the lower of cost or net realizable value, which consists of estimated
selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation.
The new guidance eliminates unnecessary complexity that exists under current “lower of cost or market” guidance. For
public entities, ASU No. 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years. The guidance is to be applied prospectively as of the beginning of an interim or annual reporting period, with
early adoption permitted. The Company does not believe the implementation of this standard will have a material impact on its consolidated
financial statements and disclosures.
In September 2015, the
FASB issued ASU 2015-16, “Business Combinations – Simplifying the Accounting for Measurement-Period Adjustments”
(“ASU 2015-16”), which eliminates the current guidance that requires an acquirer in a business combination to account
for measurement-period adjustments retrospectively as if the accounting for the business combination had been completed at the
acquisition date. Instead, under the new guidance, an acquirer recognizes measurement-period adjustments in the period in which
it determines the amount of the adjustment, including the effect on earnings of any amounts that would have been recorded in previous
periods if the accounting had been completed at the acquisition date. ASU 2015-16 does not change the criteria for determining
whether an adjustment qualifies as a measurement-period adjustment or change the length of the measurement period, which cannot
exceed one year from the date of the acquisition. The guidance is effective for annual and interim periods beginning after December
15, 2015, and the guidance is applied prospectively to adjustments to provisional amounts that occur after the adoption date. The
Company adopted ASU 2015-16 as of January 1, 2016. The adoption of this guidance impacted the Company’s accounting for its
measurement-period adjustment in connection with the Well Sell Cellular acquisition during the year ended December 31, 2016, as
described in Note 3.
In February 2016, the FASB
issued ASU No. 2016-02, “Leases” (“ASU 2016-02”)
.
Under the new guidance, at the commencement date,
lessees will be required to recognize a lease liability, which is a lessee‘s obligation to make lease payments arising from
a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to
use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term of
12 months or less. Lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted
upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases)
must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. The modified retrospective approach would not require any transition
accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective
transition approach. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In March 2016, the FASB
issued ASU No. 2016-08, “Revenue from contracts with customers (Topic 606): Principal versus Agent Considerations Reporting
Revenue Gross versus Net” (“ASU 2014-09”). The amendments are intended to improve the operability and understandability
of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and
adding additional illustrative examples to assist in the application of the guidance. The effective date and transition of these
amendments is the same as the effective date and transition of ASU 2014-09. Public entities should apply the amendments in ASU
2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. The Company
is currently evaluating the impact of the new guidance on its consolidated financial statements.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
In March 2016, the FASB
issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
(“ASU 2016-09”). ASU 2016-09 was issued as part of the FASB’s simplification initiative and affects all entities
that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of
excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting
policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification
and the classification of those taxes paid on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods
beginning after December 15, 2016. This guidance can be applied either prospectively, retrospectively or using a modified retrospective
transition method, depending on the area covered in this update. Early adoption is permitted. The Company is currently evaluating
the impact of the new guidance on its consolidated financial statements.
In April 2016, the FASB
issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”
(“ASU 2016-10”). ASU 2016-10 clarifies two aspects of Topic 606: (a) identifying performance obligations; and (b) the
licensing implementation guidance. The update is effective for annual periods beginning after December 15, 2017 including interim
reporting periods therein. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In May 2016, the FASB issued
ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients”
(“ASU 2016-12”), which further amended ASU 2016-09 by providing additional clarity in recognizing revenue from contracts
that have been modified prior to the transition period to the new standard, as well as providing additional disclosure requirements
for businesses and other organizations that make the transition to the new standard by adjusting amounts from prior reporting periods
via retrospective application. The Company is continuing to evaluate the expected impact of this standard on its consolidated financial
statements.
In August 2016, the FASB
issued ASU No. 2016-15, “Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments” (“ASU
2016-15”), which eliminates the diversity in practice related to the classification of certain cash receipts and payments
in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues: debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination;
proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including
bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization
transactions; and separately identifiable cash flows and application of the predominance principle. ASU 206-15 is effective for
annual and interim periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-15 provides for retrospective
application for all periods presented. The Company is currently evaluating the impact of the new guidance on its consolidated financial
statements.
In October 2016, the
FASB issued ASU No. 2016-16, “Income Taxes (Topic 740)” (“ASU 2016-16”), which reduces the complexity in
the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other
than inventory, when the transfer occurs. This guidance is effective for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years, with early adoption permitted using a modified retrospective transition approach. The Company
is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.
In
November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”),
providing specific guidance on the cash flow classification and presentation of changes in restricted cash and restricted cash
equivalents. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and is to be applied retrospectively.
Upon the adoption of the new guidance, the Company will change the presentation of restricted cash in its consolidated statements
of cash flows to conform to the new requirements.
In January 2017, the FASB issued ASU 2017-01,
“Business Combinations (Topic 805) Clarifying the Definition of a Business” (“ASU 2017-01”). The amendments
in ASU 2017-01 is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business
affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for
annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating
the impact of adopting this guidance.
In January 2017, the FASB
issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU
2017-04”). ASU 2017-04 eliminates Step 2 along with amending other parts of the goodwill impairment test. Under ASU 2017-04,
an entity should perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with
its carrying amount, and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04
is effective for annual periods beginning after December 15, 2019, and interim periods therein with early adoption permitted for
interim or annual goodwill impairment tests performed after January 1, 2017. At adoption, this update will require a prospective
approach. The Company is currently evaluating the impact of adopting this guidance.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 3 – Acquisition
On October 26, 2015 (the
“Closing Date”), the Company acquired BST Distribution, Inc., a New York corporation (“BST”), which owns
We Sell Cellular, and is engaged primarily in the wholesale acquisition and resale of smartphones and related devices from carriers
and big box stores. In connection with the We Sell Cellular acquisition, the Company, BST and We Sell Cellular entered into a financing
transaction on October 26, 2015 with BAM Administrative Services, LLC, a Delaware limited liability company (“BAM”),
as agent, and an institutional investor (the “Purchaser”), pursuant to which the Company issued and sold the Purchaser
a note in the principal amount of $4,040,000.
The Company, BST, and Brian
Tepfer and Scott Tepfer (together, the “Tepfers”) entered into a Stock Purchase Agreement (the “SPA”) as
a result of which BST became a wholly-owned subsidiary of the Company. The SPA and the related transactions, other than the financing
transaction, were effective as of October 1, 2015. Prior to closing of the SPA, the Tepfers owned 100% of the outstanding stock
of BST, which owns 100% of the membership interests of We Sell Cellular. In exchange for acquiring 100% of the outstanding stock
of BST, the Company issued the Tepfers 9,358,837 shares of the Company’s common stock, subject to adjustment as described
below.
In accordance with the
SPA, if the Tepfers elected to sell shares of the Company’s common stock, the Company would use its best efforts to assist
the Tepfers in selling their shares of common stock acquired under the SPA for up to $6,000,000 in gross proceeds (together and
not each) through private placements or public offerings, with target sales of $1,500,000 quarterly, commencing with the quarter
ending December 31, 2015 (the “Placement Rights”). If the price per share received by the Tepfers was less than the
greater of $1.20 or the product of an EBITDA-based formula, the Company would have been required to issue the Tepfers additional
shares of common stock. The Tepfers did not elect to sell shares of common stock during the quarter ending December 31, 2015 and
the year ended December 31, 2016.
The fair value of the Placement
Rights was determined assuming the Tepfers sold their shares of common stock evenly over four quarters, as permitted under the
SPA. Accordingly, the Placement Rights were valued as if they expired on the dates the shares of common stock were sold (see Note
10). In accordance with ASC 480-10, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities
and Equity,” the Placement Rights were treated as a derivative liability in the accompanying consolidated balance sheet because
the Company was unable to determine if it would have sufficient authorized and unissued shares to deliver to the Tepfers.
On July 27, 2016, the Company
entered into an agreement with the Tepfers pursuant to which, effective July 1, 2016, the Tepfers agreed to waive the Placement
Rights granted to them under the SPA. Accordingly, the derivative liability pertaining to the Placement Rights was eliminated with
a corresponding credit to additional paid in capital (see Note 10).
In addition, pursuant to
the SPA, the Company granted the Tepfers certain piggyback registration rights and a right of first refusal to participate in future
Company financings. The Company also created a pool of 300,000 restricted stock units which can be granted to employees of We Sell
Cellular designated by the Tepfers.
The We Sell Cellular acquisition
was accounted for under the acquisition method of accounting. Accordingly, the acquired assets and assumed liabilities were recorded
at their estimated fair values, and operating results for We Sell Cellular are included in the consolidated financial statements
from the effective date of acquisition of October 26, 2015. Total revenues and income from operations since the date of the We
Sell Cellular acquisition, included in the consolidated statement of operations for the year ended December 31, 2015, were approximately
$17,646,000 and $55,000, respectively.
During the year ended December
31, 2016, the Company recorded an adjustment to the value of the inventory acquired that existed prior to the acquisition. As a
result of the adjustment, the Company recorded an increase in goodwill of $42,198 during the year ended December 31, 2016.
The following unaudited
consolidated pro forma information gives effect to the We Sell Cellular acquisition as if the transaction had occurred on January
1, 2015. The following pro forma information is presented for illustration purposes only and is not necessarily indicative of the
results that would have been attained had the acquisition been completed on January 1, 2015, nor are they indicative of results
that may occur in any future periods.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
|
|
Year Ended
December 31, 2015
|
|
Revenues
|
|
$
|
78,563,161
|
|
Loss from operations
|
|
$
|
(2,516,609
|
)
|
Net loss
|
|
$
|
(3,867,598
|
)
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
19,277,511
|
|
Note 4 - Property and Equipment
Property and equipment
consists of the following at December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Machinery and Equipment
|
|
$
|
89,690
|
|
|
$
|
73,256
|
|
Leasehold Improvements
|
|
|
139,254
|
|
|
|
120,333
|
|
Computer Software
|
|
|
21,564
|
|
|
|
21,564
|
|
Furniture and Fixtures
|
|
|
5,645
|
|
|
|
5,645
|
|
|
|
|
256,153
|
|
|
|
220,798
|
|
Less: Accumulated Depreciation
|
|
|
(64,196
|
)
|
|
|
(27,555
|
)
|
Property and Equipment, Net
|
|
$
|
191,957
|
|
|
$
|
193,243
|
|
Depreciation expense on
property and equipment amounted to $45,000 and $15,000 for the years ended December 31, 2016 and 2015, respectively.
Note 5 – Intangible Assets, Net
Intangible assets, net is as follows:
December 31, 2016
|
|
Useful Lives
(Years)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Trade Name
|
|
7
|
|
$
|
2,622,000
|
|
|
$
|
(436,996
|
)
|
|
$
|
2,185,004
|
|
Customer Relationships
|
|
5
|
|
|
2,008,000
|
|
|
|
(468,538
|
)
|
|
|
1,539,462
|
|
eBay Reputation Relationship
|
|
1
|
|
|
369,000
|
|
|
|
(369,000
|
)
|
|
|
-
|
|
Non-Compete Agreement
|
|
1
|
|
|
283,000
|
|
|
|
(283,000
|
)
|
|
|
-
|
|
Intangible assets, net
|
|
|
|
$
|
5,282,000
|
|
|
$
|
(1,557,534
|
)
|
|
$
|
3,724,466
|
|
December 31, 2015
|
|
Useful Lives
(Years)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Trade Name
|
|
7
|
|
$
|
2,622,000
|
|
|
$
|
(62,428
|
)
|
|
$
|
2,559,572
|
|
Customer Relationships
|
|
5
|
|
|
2,008,000
|
|
|
|
(66,934
|
)
|
|
|
1,941,066
|
|
eBay Reputation Relationship
|
|
1
|
|
|
369,000
|
|
|
|
(61,500
|
)
|
|
|
307,500
|
|
Non-Compete Agreement
|
|
1
|
|
|
283,000
|
|
|
|
(47,166
|
)
|
|
|
235,834
|
|
Intangible assets, net
|
|
|
|
$
|
5,282,000
|
|
|
$
|
(238,028
|
)
|
|
$
|
5,043,972
|
|
Intangible assets are amortized on a straight-line
basis over their estimated useful lives. Amortization expense amounted to $1,319,000 and $238,000 for the years ended December
31, 2016 and 2015, respectively.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Future annual estimated amortization expense
is summarized as follows:
Years ending December 31,
|
|
|
|
2017
|
|
$
|
776,171
|
|
2018
|
|
|
776,171
|
|
2019
|
|
|
776,171
|
|
2020
|
|
|
709,233
|
|
2021
|
|
|
374,571
|
|
Thereafter
|
|
|
312,149
|
|
|
|
$
|
3,724,466
|
|
Note 6 – Capitalized Technology, Net
Capitalized technology consists of the following
at December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Gross value
|
|
$
|
3,171,414
|
|
|
$
|
2,575,886
|
|
Accumulated amortization
|
|
|
(2,237,221
|
)
|
|
|
(1,689,343
|
)
|
Net value
|
|
$
|
934,193
|
|
|
$
|
886,543
|
|
Capitalized technology
is amortized on a straight-line basis over their estimated useful lives of three years. Amortization expense amounted to $548,000
and $567,000 for the years ended December 31, 2016 and 2015, respectively, and is included in cost of revenue.
Future annual estimated amortization expense
is summarized as follows:
Years ending December 31,
|
|
|
|
2017
|
|
$
|
519,680
|
|
2018
|
|
|
302,618
|
|
2019
|
|
|
111,895
|
|
|
|
$
|
934,193
|
|
Note 7 - Promissory Notes
At December 31, 2016, the
Company’s Notes (as defined below) is comprised of the following:
Total Notes
|
|
$
|
8,080,000
|
|
Less: Unamortized discount and debt issue costs
|
|
|
(965,668
|
)
|
Total Notes, net of unamortized discount and debt issue costs
|
|
|
7,114,332
|
|
Less: Current portion of Notes
|
|
|
673,332
|
|
Long-term Notes
|
|
$
|
6,441,000
|
|
On October 23, 2015 (the
“Note Closing Date”), in connection with the closing of the SPA and related transactions, the Company, BST, We Sell
Cellular, BAM, as agent, and the Purchaser, an institutional investor, entered into a Note Purchase Agreement (the “BAM NPA”)
pursuant to which the Company issued and sold the Purchaser a 1% original issue discount Secured Term Note in the aggregate principal
amount of $4,040,000 (the “Initial Note”) in exchange for gross proceeds of $4,000,000.
Within six months of the
Note Closing Date, the Company was permitted to receive up to two additional draws of funds in connection with the issuance of
additional 1% original issue discount Secured Term Note (the “Deferred Draw Notes,” and with the “Initial Note,”
the “Notes”). The BAM NPA provided that the Company could elect to receive a total of another $4,000,000 under the
Deferred Draw Notes in compliance with the covenants under the BAM NPA. The proceeds of the Notes could be used for working capital
and other general corporate purposes.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
The Notes was to mature
three years from the Note Closing Date and accrued interest at 13.25% annually, which was payable monthly in arrears, beginning
November 1, 2015. Repayment of principal originally commenced seven months from the Note Closing Date in monthly installments
of 1/48
th
of the aggregate principal amount of the Notes (see below). The Notes were prepayable at 103%, beginning
one year from the Note Closing Date, in increments of $500,000.
In connection with the
issuance of the Initial Note, the Company issued the Purchaser 740,000 shares of its common stock. On December 1, 2015, the Company
elected to borrow an additional $2,000,000 and issued the Purchaser a Deferred Draw Note in the principal amount of $2,020,000
and issued the Purchaser an additional 120,000 shares of common stock.
The Company maintained
a dedicated bank account with a third party custodian pursuant to which all accounts receivable and Collateral proceeds (as defined
in the BAM NPA) were deposited to this account. The Company could only access funds in this account in accordance with the terms
of the BAM NPA. This account was controlled by BAM and is presented as restricted cash in the accompanying consolidated balance
sheets.
On March 30, 2016, the
Company received $2,000,000 in connection with the issuance of a Secured Term Note in the original principal amount of $2,020,000
(the “Second Deferred Draw Note”) under the terms of the Company’s original BAM NPA. In connection with the closing
of the Second Deferred Draw Note, the Purchaser was issued an additional 350,000 shares of restricted common stock, consisting
of the 120,000 shares required by the original BAM NPA for the issuance of the Second Deferred Draw Note, and an additional 230,000
shares as consideration for the covenant modifications referenced below. The Company paid an additional $31,000 of costs in connection
with the closing of the Second Deferred Draw Note.
On March 31, 2016, the
Company amended the terms of its BAM NPA with BAM, and the Purchaser, pursuant to which the Company received the following modifications
of covenants applicable to the credit facility:
|
·
|
The EBITDA covenants would not apply until September 2017;
|
|
·
|
The amortization period of the principal would not commence until September 1, 2017;
|
|
·
|
The interest rate was increased by one-quarter of one percent (25 basis points) from 13.0% to 13.25%;
|
|
·
|
The Company would get 75% credit for new purchase orders towards the borrowing base of the facility instead of the previous
50%; and
|
|
·
|
The Company would get a 90% credit for inventory in transit towards the borrowing base instead of the previous 75%.
|
The Company analyzed the
modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows of the modified debt
was less than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments
were not substantially different. Accordingly, the Company did not treat the original BAM NPA as having been extinguished and exchanged
for a new BAM NPA.
The Company determined
the value of the 1,210,000 shares of common stock issued to the Purchaser to be $1,128,300, based upon the quoted closing trading
price of the Company’s common stock on the date of grant. The issuance of the 1,210,000 shares of common stock has been treated
as a debt issue cost and, accordingly, has been recorded as a direct deduction from the carrying amount of Notes and was being
amortized to interest expense over the contractual term of the Notes. During the years ended December 31, 2016 and 2015, accretion
of the costs amounted to $360,000 and 36,000, respectively.
The Company recorded a
discount on the Notes of $80,000 which was being accreted to non-cash interest expense over the contractual term of the Notes.
During the years ended December 31, 2016 and 2015, accretion of the discount amounted to $26,000 and $3,000, respectively. Contractual
interest expense on the Notes amounted to $1,019,000 and $172,000 for the years ended December 31, 2016 and 2015, respectively.
The Company incurred fees
associated with the closing of the Notes of $288,000. These amounts were treated as a debt issue cost and, accordingly, have been
recorded as a direct deduction from the carrying amount of Notes and were being amortized to interest expense over the contractual
term of the Notes. During the years ended December 31, 2016 and 2015, accretion of the fees amounted to $93,000 and $13,000, respectively.
On January 13, 2017, the
Company entered into a Note Purchase Agreement (the “NPA”) with an institutional investor (the “Investor,”
the “Lender” or the “Manager”) pursuant to which the Company issued the Lender a secured term note in the
principal amount of $8,660,000 at an original issue discount of 1%, for gross proceeds of $8,572,400 (the “2017 Note”).
The Company applied the proceeds received upon the issuance of the 2017 Note to repay all amounts outstanding under the BAM NPA.
At the time of repayment, amounts of principal outstanding under the BAM NPA were $8,080,000, with accrued interest and fees bringing
the total payoff amount to $8,140,296 (see Note 16).
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 8 – Capital Lease Obligations
We are obligated under
a capital lease under which the aggregate present value of the minimum lease payments amounted to $55,000. The present value of
the minimum lease payments was calculated using a discount rate of 8.64%. The future minimum lease payments under the capital lease
at December 31, 2016 is as follows:
Years ending December 31,
|
|
|
|
2017
|
|
$
|
15,316
|
|
2018
|
|
|
15,316
|
|
2019
|
|
|
15,316
|
|
2020
|
|
|
15,316
|
|
2021
|
|
|
10,211
|
|
|
|
|
71,475
|
|
Less: Amounts representing interest
|
|
|
12,825
|
|
Principal portion
|
|
|
58,650
|
|
Less: Current portion
|
|
|
10,664
|
|
Capital lease obligations, net of current portion
|
|
$
|
47,986
|
|
The capital lease obligations are collateralized
by underlying property and equipment. As of December 31, 2016, the gross amount of property and equipment under non-cancelable
capital leases was $62,000 and the amount of accumulated amortization was $3,100.
Note 9 - Commitments and Contingencies
Management Incentive Compensation Plan
On July 27, 2016, the Company
adopted its Management Incentive Compensation Plan (the “Incentive Plan”). The Incentive Plan provides that each quarter
that the Company meets certain gross EBITDA thresholds, participants will be eligible to receive quarterly bonuses. The Incentive
Plan is effective through September 2018. The Incentive Plan provides for minimum bonus eligibility thresholds set at quarterly
gross EBITDA levels that ensure that the Company will remain cash-flow positive and in compliance with all debt covenants over
the term after payment of bonuses. If the Company does not meet the minimum EBITDA threshold in a given quarter, no bonus is payable
under the Incentive Plan for that quarter. Bonuses will be subject to adjustment in the event the Company’s year-end audit
results in restatement of a prior quarter’s EBITDA. As of December 31, 2016, a total of $104,183 was earned under the Incentive
Plan, of which $52,092 has been paid and $52,091 is included in accrued expenses.
Private Sale of Common Stock
On December 22, 2016, Brian
Tepfer and Scott Tepfer each sold 500,000 shares of the Company’s common stock at $1.00 per share to an investment fund (the
“Purchaser”) and each issued to the Purchaser a five-year option to purchase an additional 500,000 shares of the Company’s
common stock at $1.00 per share. The securities were sold in a private transaction which was initiated by an investment fund that
has investment power on behalf of the Purchaser. As an inducement to the Purchaser, the Company granted demand and piggy back registration
rights to the Purchaser and another shareholder of the Company over which the investment fund exercises investment power. If the
registration rights are exercised, the two investment funds will pay the legal and other expenses of the Company.
Legal Proceedings
From time to time, the
Company is a party to or otherwise involved in legal proceedings arising in the normal and ordinary course of business. As of the
date of this report, the Company is not aware of any proceeding, threatened or pending, against the Company which, if determined
adversely, would have a material effect on its business, results of operations, cash flows or financial position.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Operating
Leases
The Company leases space
for operations, sales, customer support and corporate purposes under a lease agreement that expires in August 2018. The Company
also leases space for its warehouse and office under a lease that expires in September 2021. The leases contain provisions requiring
the Company to pay maintenance, property taxes and insurance and require scheduled rent increases. Rent expense is recognized on
a straight-line basis over the terms of the leases.
Rent expense, amounting
to $235,000 and $100,000 for the years ended December 31, 2016 and 2015, respectively, is included in general and administrative
expense in the consolidated statements of operations.
Future annual minimum payments
due under the leases are summarized as follows:
Year ended December 31,
|
|
|
|
2017
|
|
$
|
323,000
|
|
2018
|
|
|
304,000
|
|
2019
|
|
|
225,000
|
|
2020
|
|
|
232,000
|
|
2021
|
|
|
177,000
|
|
|
|
$
|
1,261,000
|
|
Note 10 – Stockholders’ Equity
Convertible Series A Preferred Stock
In October 2015, in connection
with the We Sell Cellular acquisition, holders of 100,000 shares of the Company’s Convertible Series A Preferred Stock agreed
to convert their preferred stock into 100,000 shares of common stock. As a result, there are no shares of Convertible Series A
Preferred Stock outstanding as of December 31, 2016 and 2015.
Convertible Series B Preferred Stock
In October 2015, in connection
with the We Sell Cellular acquisition, holders of 951,250 shares of the Company’s Convertible Series B Preferred agreed to
convert their preferred stock converted into 60,411 shares of common stock. As a result, there are no shares of Convertible Series
B Preferred Stock outstanding as of December 31, 2016 and 2015.
Convertible Series C Preferred Stock
In October 2015, in connection with the We Sell
Cellular acquisition, holders of 146,667 shares of the Company’s Convertible Series C Preferred Stock agreed to convert their
preferred stock into 146,667 shares of common stock. As a result, there are no shares of Convertible Series C Preferred Stock outstanding
as of December 31, 2016 and 2015.
Series E Preferred Stock
In October 2015, in connection
with the We Sell Cellular acquisition, holders of 103,232 shares of the Company’s Convertible Series E Preferred Stock agreed
to convert their preferred stock into 103,232 shares of common stock. As a result, there are no shares of Convertible Series E
Preferred Stock outstanding as of December 31, 2016 and 2015.
Common Stock
On March 16, 2015, the
Company filed a Certificate of Correction pursuant to which the number of authorized shares of the Company’s common stock
was decreased from 650,000,000 shares to 43,333,333 shares to properly reflect the Company’s 1-for-15 reverse stock split
on January 21, 2014. The par value remained the same. All share and per share amounts have been retroactively restated to reflect
the reverse stock split.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 12 - Stock-Based Compensation
Stock Option Grants
On January 6, 2016 and
April 14, 2016, the Company amended its 2008 Equity Incentive Plan (the “Plan”) to increase the number of authorized
shares of common stock under the Plan by 290,000 shares and 200,000 shares, respectively. The Company is now authorized to issue
1,582,023 shares under the Plan. The Plan is administered by the board of directors. Under the Plan, the board of directors is
authorized to grant awards to employees, consultants and any other persons to whom the Plan is applicable and to determine the
number and types of such awards and the terms, conditions, vesting and other limitations applicable to each such award. The Plan
provides for the issuance of both incentive stock options (“ISO’s”) and non-qualified stock options (“NQO’s”).
ISO’s can only be granted to employees and NQO’s can be granted to directors, officers, employees, consultants, independent
contractors and advisors. As of December 31, 2016, there were 365,188 shares of common stock available for issuance under the Plan.
The fair value of options
is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined by the Black-Scholes pricing
model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual
and projected employee stock option exercise behaviors. The risk free rate is based on the U.S. Treasury rate for the expected
life at the time of grant, volatility is based on the average of the Company’s long-term implied volatility, the expected
life is based on the estimated average of the life of options using the simplified method, and forfeitures are estimated on the
date of grant based on certain historical data. The Company utilizes the simplified method to determine the expected life of its
options due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The
expected dividend assumption is based on the Company’s history and expectation of dividend payouts.
Forfeitures are required to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
During the year ended
December 31, 2015, the Company granted 121,000 stock options to employees for future services. These options had a fair value of
$79,000, using the Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate
|
|
|
1.12% – 1.47
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
61.89% - 99.21
|
%
|
Expected term
|
|
|
3.75 years
|
|
The options are exercisable
over a five-year term and vest over four years. The Company recorded $16,000 and $26,000 during the years ended December 31, 2016
and 2015, respectively, as compensation expense pertaining to these grants.
In connection with the We Sell Cellular acquisition,
on October 26, 2015, the Company determined to accelerate the vesting of stock options previously granted to employees and, therefore,
recognized the remaining value of the stock options in the amount of $330,000.
During the year ended December
31, 2016, the Company granted 10,000 stock options to an employee for future services. These options had a fair value of $8,800,
using the Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate
|
|
|
0.94
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
166.35
|
%
|
Expected term
|
|
|
3.5 years
|
|
The options are exercisable
over a five-year term and vest over three years. The Company recorded $2,000 during the year end December 31, 2016, as compensation
expense pertaining to these grants.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
The following table summarizes
the Company’s stock option activity for the year ended December 31, 2016:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding - December 31, 2015
|
|
|
575,685
|
|
|
$
|
2.75
|
|
|
|
3.0
|
|
|
$
|
1,509
|
|
Granted
|
|
|
10,000
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or Canceled
|
|
|
(150,687
|
)
|
|
|
3.10
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2016
|
|
|
434,998
|
|
|
$
|
2.59
|
|
|
|
1.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – December 31, 2016
|
|
|
389,997
|
|
|
$
|
2.74
|
|
|
|
1.4
|
|
|
$
|
-
|
|
The Company recorded non-cash
compensation expense of $18,000 and $543,000 for the year ended December 31, 2016 and 2015, respectively, pertaining to stock option
grants.
The weighted-average grant
date fair value of options granted during the years ended December 31, 2016 and 2015 was $0.88 and $0.65, respectively. Total unrecognized
compensation expense related to unvested stock options at December 31, 2016 amounts to $37,000 and is expected to be recognized
over a weighted average period of 2.0 years.
The following table summarizes
the Company’s stock option activity for non-vested options for the year ended December 31, 2016:
|
|
Number of
Options
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Balance at December 31, 2015
|
|
|
55,000
|
|
|
$
|
0.86
|
|
Granted
|
|
|
10,000
|
|
|
|
0.88
|
|
Vested
|
|
|
(19,999
|
)
|
|
|
(0.86
|
)
|
Forfeited or Canceled
|
|
|
-
|
|
|
|
-
|
|
Balance at December 31, 2016
|
|
|
45,001
|
|
|
$
|
0.86
|
|
Warrants
As of December 31, 2016
and 2015, there were 801,250 warrants and 802,520 warrants outstanding and exercisable, respectively, with a weighted average exercise
price of $3.19 and $3.21 per share, respectively. The weighted average remaining contractual life of the warrants outstanding and
exercisable at December 31, 2016 and 2015 was 2.8 and 3.6 years, respectively, and the aggregate intrinsic value was $0.
The Company did not grant
any warrants to purchase shares of common stock during the years ended December 31, 2016 and 2015.
There was no expense pertaining
to warrants recorded during the year ended December 31, 2016 and 2015.
Restricted Stock Awards
On April 1, 2015, the
Company granted 5,200 RSUs to its Chief Financial Officer. The RSUs vested monthly over a three-month period through June 30, 2015,
subject to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value of the
common stock on the date of grant was $1.03 per share, based upon the closing market price on the grant date. In connection with
the We Sell Cellular acquisition, the Company agreed to accelerate the delivery of the RSUs and the Company issued 5,200 shares
of common stock. The aggregate grant date fair value of the award amounted to $5,000, which was recorded as compensation expense
during the year ended December 31, 2015.
On July 1, 2015, the Company
granted 5,384 RSUs to its Chief Financial Officer. The RSUs vested monthly over a three-month period through September 30, 2015,
subject to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value of the
common stock on the date of grant was $1.25 per share, based upon the closing market price on the grant date. In connection with
the We Sell Cellular acquisition, the Company agreed to accelerate the delivery of the RSUs and the Company issued 5,384 shares
of common stock.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
The aggregate grant date
fair value of the award amounted to $7,000, which was recorded as compensation expense during the year ended December 31, 2015.
On October 1, 2015, the
Company granted 8,235 RSUs to its Chief Financial Officer. The RSUs vested monthly over a three-month period through December 31,
2015, subject to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value
of the common stock on the date of grant was $0.76 per share, based upon the closing market price on the grant date. In connection
with the We Sell Cellular acquisition, the Company agreed to accelerate the delivery of the RSUs and the Company issued 8,235 shares
of common stock. The aggregate grant date fair value of the award amounted to $6,000, which was recorded as compensation expense
during the year ended December 31, 2015.
As a result of the We
Sell Cellular acquisition, on October 26, 2015, the Company granted 150,000 shares of fully vested restricted common stock to each
of its Executive Chairman and Chief Executive Officer for services previously provided. The fair value of the common stock on the
date of grant was $0.77 per share, based upon the quoted closing trading price of the Company’s common stock on the grant
date. The aggregate grant date fair value of the award amounted to $231,000, which was recorded as compensation expense during
the year ended December 31, 2015.
As a result of the We Sell
Cellular acquisition, on October 26, 2015, the Company granted 350,000 RSUs to its Chief Executive Officer. The RSUs vest annually
over three years, subject to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The
fair value of the common stock on the date of grant was $0.77 per share, based upon the quoted closing trading price of the Company’s
common stock on the grant date. The aggregate grant date fair value of the award amounts to $269,500, which is being recognized
as compensation expense over the vesting period. The Company recorded $90,000 and $15,000 of compensation expense during the years
ended December 31, 2016 and 2015, respectively, with respect to this award.
On December 10, 2015, the
Company granted 125,000 RSUs to certain of employees. The RSUs vest quarterly over a three years, subject to continued service
on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value of the common stock on the date of
grant was $1.28 per share, based upon the quoted closing trading price of the Company’s common stock on the grant date. The
aggregate grant date fair value of the award amounts to $160,000, which is being recognized as compensation expense over the vesting
period. The Company recorded $53,000 and $4,000 of compensation expense during the years ended December 31, 2016 and 2015, respectively,
with respect to this award.
On December 10, 2015, the
Company granted 475,000 shares of restricted common stock to certain employees, of which 135,000 shares were fully vested on the
date of grant. The remaining 340,000 shares of common stock vest quarterly over three years, subject to continued service on each
applicable vesting date. The fair value of the common stock on the date of grant was $1.28 per share, based upon the quoted closing
trading price of the Company’s common stock on the grant date. The aggregate grant date fair value of the award amounts to
$608,000, which is being recognized as compensation expense over the vesting period. The Company recorded $145,000 and $185,000
of compensation expense during the years ended December 31, 2016 and 2015, respectively, with respect to this award.
On January 1, 2016, the
Company granted 5,208 restricted stock units (“RSUs”) to its Chief Financial Officer. The RSUs vested monthly over
a three-month period through March 31, 2016, subject to continued service on each applicable vesting date. The RSUs have no voting
or dividend rights. The fair value of the common stock on the date of grant was $1.23 per share, based upon the closing market
price on the grant date. The aggregate grant date fair value of the award amounted to $6,000, which was recorded as compensation
expense during the year ended December 31, 2016.
On January 6, 2016, the
Company granted 250,000 RSUs to the directors of the Company’s Board of Directors. The RSUs vest in two equal annual increments,
subject to continued service on each vesting date, with the first vesting date being one year from the grant date, and full vesting
upon a change in control. The RSUs will be delivered three years from the date of grant. The RSUs have no voting or dividend rights.
The fair value of the common stock on the date of grant was $1.23 per share, based upon the closing market price on the grant date.
The aggregate grant date fair value of the awards amounted to $308,000. The Company recorded $154,000 of compensation expense during
the year ended December 31, 2016 related to this award.
On April 1, 2016, the Company
granted 6,433 RSUs to its Chief Financial Officer. The RSUs vested monthly over a three-month period through June 30, 2016, subject
to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value of the common
stock on the date of grant was $1.15 per share, based upon the closing market price on the grant date. The aggregate grant date
fair value of the award amounted to $7,000, which was recorded as compensation expense during the year ended December 31, 2016.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
On April 18, 2016, the
Company granted 7,000 fully vested shares of common stock to an advisor for services provided. The fair value of the common stock
on the date of grant was $0.80 per share, based upon the closing market price on the grant date. The aggregate grant date fair
value of the award amounted to $5,600, which was recorded as compensation expense during the year ended December 31, 2016.
During the quarter ended
June 30, 2016, the Company granted an aggregate of 6,000 fully vested shares of common stock to its Chief Financial Officer. The
fair value of the common stock on the dates of grant ranged from $0.90 to $1.00 per share, based upon the closing market price
on the respective grant dates. The aggregate grant date fair value of the awards amounted to $6,000, which was recorded as compensation
expense during the year ended December 31, 2016.
During the year ended December
31, 2016, the Company granted 18,000 fully vested shares of common stock to an advisor for services provided. The fair value of
the common stock on the dates of grant ranged from $0.51 to $1.00 per share. The aggregate grant date fair value of the award amounted
to $16,000, which was recorded as compensation expense during the year ended December 31, 2016.
On July 1, 2016, the Company
granted 6,379 RSUs to its Chief Financial Officer. The RSUs vested monthly over a three-month period through September 30, 2016,
subject to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value of the
common stock on the date of grant was $0.90 per share, based upon the closing market price on the grant date. The aggregate grant
date fair value of the award amounted to $6,000, which was recorded as compensation expense during the year ended December 31,
2016.
A summary of the restricted
stock award activity for the year ended December 31, 2016 is as follows:
|
|
Number of
Shares
|
|
Unvested Outstanding at December 31, 2015
|
|
|
831,662
|
|
Granted
|
|
|
301,020
|
|
Forfeited
|
|
|
-
|
|
Vested
|
|
|
(339,349
|
)
|
Unvested Outstanding at December 31, 2016
|
|
|
793,333
|
|
The Company recorded non-cash
compensation expense of $507,000 and $2,411,000 for the years December 31, 2016 and 2015, respectively.
Total unrecognized compensation
expense related to unvested stock awards and unvested restricted stock units at December 31, 2016 amounts to $699,000 and is expected
to be recognized over a weighted average period of 1.6 years.
Note 13 - Income Taxes
The Company recognizes
deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis
of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards.
The Company established a valuation allowance to reflect the likelihood of realization of deferred tax assets.
The valuation allowance
at December 31, 2016 was approximately $8,730,000. The net change in the valuation allowance during the year ended December 31,
2016 was an increase of approximately $404,000. In assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization
of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined
that enough uncertainty exists relative to the realization of the deferred tax asset to warrant the application of a full valuation
allowance as of December 31, 2016 and 2015.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
The Company has
a net operating loss carryforward totaling approximately $15,688,000 at December 31, 2016, expiring through 2036. Pursuant to
Code Sec. 382 of the Internal Revenue Code, the utilization of net operating loss carryforwards may be limited as a result of
a cumulative change in stock ownership of more than 50% over a three year period. The Company underwent such a change and consequently,
the utilization of a portion of the net operating loss carryforwards is subject to certain limitations. Temporary differences
are approximately as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accrued expenses
|
|
$
|
238,000
|
|
|
$
|
259,000
|
|
Inventory reserve
|
|
|
42,000
|
|
|
|
-
|
|
Allowance for doubtful accounts
|
|
|
1,000
|
|
|
|
6,000
|
|
Intangible Assets
|
|
|
(1,092,000
|
)
|
|
|
(2,187,000
|
)
|
Fixed Assets
|
|
|
(415,000
|
)
|
|
|
(238,000
|
)
|
Charitable Contributions
|
|
|
2,000
|
|
|
|
2,000
|
|
Stock Options
|
|
|
2,811,000
|
|
|
|
3,466,000
|
|
Net operating loss carryover
|
|
|
7,143,000
|
|
|
|
7,018,000
|
|
Deferred tax assets
|
|
|
8,730,000
|
|
|
|
8,326,000
|
|
Less: valuation allowance
|
|
|
(8,730,000
|
)
|
|
|
(8,326,000
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The actual tax benefit differs from the expected
tax benefit for the years ended December 31, 2016 and 2015 (computed by applying the U.S. Federal Corporate income tax rate of
34%) as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Expected tax benefit
|
|
$
|
1,262,000
|
|
|
$
|
1,709,000
|
|
State income taxes, net of federal benefit
|
|
|
66,000
|
|
|
|
353,000
|
|
Net operating loss adjustment due to Section 382 limitation
|
|
|
-
|
|
|
|
(5,346,000
|
)
|
Permanent items
|
|
|
(416,000
|
)
|
|
|
(650,000
|
)
|
Change in tax rate
|
|
|
(200,000
|
)
|
|
|
537,000
|
|
True-up
|
|
|
(308,000
|
)
|
|
|
887,000
|
|
Change in valuation allowance
|
|
|
(404,000
|
)
|
|
|
4,903,000
|
|
Actual tax benefit
|
|
$
|
-
|
|
|
$
|
2,393,000
|
|
Note 14 – Customer and Vendor Concentrations
Customer Concentration
During the year ended December
31, 2016 and 2015, there were no customers that represented at least 10% of revenues. During the year ended December 31, 2016 and
2015, 64% and 58% of the Company’s revenues, respectively, were originated in the United States, 22% and 24% of the Company’s
revenues, respectively, were originated in Europe and 12% and 18% of the Company’s revenues were originated in Hong Kong.
At December 31, 2016, two
customers represented at least 10% of accounts receivable, accounting for 22% and 15% of the Company’s accounts receivable.
At December 31, 2015, there were no customers that represented at least 10% of accounts receivable.
Vendor Concentration
During the year ended December
31, 2016 and 2015, one vendor represented at least 10% of purchases, accounting for 72% and 94% of the Company’s purchases,
respectively.
At December 31, 2016, one
vendor represented at least 10% of accounts payable, accounting for 52% of accounts payable. At December 31, 2015, one vendor represented
at least 10% of accounts payable, accounting for 40%, of the Company’s accounts payable.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note
15 - Fair Value Measurements
The fair value of the Company’s
financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection
with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market
participants at the measurement date. In connection with measuring the fair value of the Company’s assets and liabilities,
the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the
use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following
fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in
order to value the assets and liabilities:
|
Level 1:
|
Quoted prices in active markets for identical assets
or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur
with sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
Level 2:
|
Observable inputs other than Level 1 inputs. Examples
of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets
or liabilities in markets that are not active.
|
|
Level 3:
|
Unobservable inputs based on the Company’s assessment
of the assumptions that market participants would use in pricing the asset or liability.
|
The following table presents
information about the Company’s liabilities that are measured at fair value on a recurring basis at December 31, 2016 and
2015, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
|
|
|
|
|
December 31,
|
|
Description
|
|
Level
|
|
|
2016
|
|
|
2015
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Placement Right Derivative Liability
|
|
|
3
|
|
|
$
|
-
|
|
|
$
|
1,130,000
|
|
Level 3 liabilities are
valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the
derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s
Chief Financial Officer, who reports to the Chief Executive Officer, determines its valuation policies and procedures. The development
and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility
of the Company’s Chief Financial Officer and is approved by the Chief Executive Officer.
The Company has determined
the estimated fair value amounts using available market information and appropriate methodologies. However, considerable judgment
is required in interpreting market data to develop the estimates of fair value. The estimates presented are not necessarily indicative
of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts. The Company has based these fair value estimates
on pertinent information available as of the respective balance sheet dates and has determined that, as of such dates, the carrying
value of all financial instruments approximates fair value.
Level 3 Valuation Techniques:
Level 3 financial liabilities
consist of placement right liabilities for which there is no current market for these securities such that the determination of
fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair
value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
The Company uses the Black-Scholes
option pricing model to value Level 3 financial liabilities at inception and on subsequent valuation dates. This model incorporates
transaction details such as the Company’s stock price, contractual terms, maturity, and risk free rates, as well as volatility.
A significant increase
in the volatility or a significant increase in the Company’s stock price, in isolation, would result in a significantly higher
fair value measurement. Changes in the values of the derivative liabilities are recorded in “change in fair value of placement
right derivative liability” in the Company’s condensed consolidated statements of operations.
As of December 31, 2016
and 2015, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
The placement right liability
was valued using the Black-Scholes option pricing model and the following assumptions on the following dates:
|
|
July 1,
2016
|
|
|
December 31,
2015
|
|
Exercise price
|
|
$
|
1.20
|
|
|
$
|
1.20
|
|
Stock price
|
|
$
|
0.90
|
|
|
$
|
1.11
|
|
Expected life
|
|
|
0 years
|
|
|
|
0.18-0.93 years
|
|
Risk-free interest rate
|
|
|
0.26
|
%
|
|
|
0.02%-0.25
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Volatility
|
|
|
1
|
%
|
|
|
59
|
%
|
The following table reflects
the change in fair value of the Company’s derivative liability for the year ended December 31, 2016:
Balance – January 1, 2015
|
|
$
|
1,130,000
|
|
Change in fair value of placement right liability
|
|
|
370,000
|
|
Elimination of placement right liability
|
|
|
(1,500,000
|
)
|
Balance – December 31, 2016
|
|
$
|
-
|
|
As discussed in Note 3,
on July 27, 2016, the Company entered into an agreement with the Tepfers pursuant to which, effective July 1, 2016, the Tepfers
agreed to waive the Placement Rights granted to them under the SPA. Accordingly, the Company recorded an expense of $370,000 during
the year ended December 31, 2016, representing the change in the fair value of the derivative liability pertaining to the Placement
Rights through July 1, 2016 and, as the derivative liability was eliminated on July 1, 2016, recorded $1,500,000 as additional
paid in capital.
Note 16 – Subsequent Events
The Company evaluates subsequent
events and transactions that occur after the balance sheet date up to the date that the financial statements were issued for potential
recognition or disclosure. Other than as described below, the Company did not identify any subsequent events that would have required
adjustment or disclosure in the financial statements.
Special Purpose Entity
On the January 13, 2017
(the “Closing Date”), the Company and the Manager formed a special purpose entity as a Delaware limited liability company
(the “SPE”), for the purpose of purchasing, refurbishing, repairing and reselling cell phones, smart phones, tablets
and related accessories. The Manager is the sole manager of the SPE. The Manager invested $5,200,000 in equity in exchange for
a membership interest. Of this sum, $5,000,000 will be used by the SPE for the purchase of approved inventory.
As further detailed in
the Services Agreement entered into between the Company and the SPE on the Closing Date, the Company will provide all administrative
and inventory management services necessary to the SPE’s daily operations. uSell and its personnel will not be compensated
for providing services to the SPE, and uSell will generally be responsible for the costs of providing services to the SPE. However,
the SPE will be responsible for costs directly related to acquiring and refurbishing the SPE’s inventory, shipping, certain
tax accounting fees approved by the Manager, and other costs. The Services Agreement allows uSell to purchase inventory for its
account and not for the SPE’s account until uSell has no available capital to purchase inventory. In exchange for its future
services, uSell received its membership interest in the SPE. Profits from the SPE will be distributed to the Manager and to uSell
based on certain return thresholds.
Note Purchase Agreement
and Secured Term Note
On the Closing Date, the
Company entered into an NPA with the Lender (in Lender’s capacity as a purchaser and as the agent (the “Agent”)
for all purchasers from time to time party to the NPA), pursuant to which the Company issued the Lender a secured term note in
the principal amount of $8,660,000 at an original issue discount of 1%, for gross proceeds of $8,572,400 (the “2017 Note”).
The 2017 Note matures three years from issuance and bears interest at an annual rate of 13.25%, which interest is due and payable
monthly in arrears. In addition, the Company paid the Lender a fee equal to 2% of the aggregate original principal amount of the
2017 Note and will pay the Lender a monthly maintenance fee based on an annual rate of 0.75% of the aggregate original principal
amount of the 2017 Note. The 2017 Note is prepayable after 18 months with a 3% prepayment penalty. The 2017 Note contains customary
financial covenants. In connection with the issuance of the 2017 Note, the Company granted the Lender a right of first refusal
to participate in future financings (with certain exceptions) for as long as the principal balance of the 2017 Note remains outstanding.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
The Company applied the
proceeds received upon the issuance of the 2017 Note to repay all amounts outstanding under the BAM NPA.
Security Agreements,
Subsidiary Guaranty and Pledge Agreement
In connection with the
execution of the NPA and issuance of the 2017 Note, the Company entered into a Security Agreement for the benefit of the Lender
and Agent. Pursuant to the Security Agreement, the Company granted the Agent (for the benefit of the Lender) a lien on all of the
Company’s respective assets, including, but not limited to, equipment, inventory, accounts, and intellectual property. The
wholly-owned subsidiaries which are parties to the Security Agreement also jointly and severally guaranteed payment and performance
of all obligations under the 2017 Note and related debt transaction documents. The Company also entered into a Trademark Security
Agreement with the Lender incorporating the terms of the Security Agreement with respect to the Company’s trademark-related
collateral.
As additional collateral
to guarantee the 2017 Note and related obligations, the Company also entered into a Pledge Agreement for the benefit of the Agent
pursuant to which the Company pledged the equity interests of certain of its wholly-owned subsidiaries and the Company pledged
its equity interest in the SPE.
In connection with the
above, the Management Agreement effective as of October 1, 2015 by and among the Company, Nik Raman, Brian Tepfer, Scott Tepfer,
and Daniel Brauser, uSell’s Executive Chairman, was amended to clarify that nothing in the Management Agreement precludes
the Agent’s ability to exercise its remedies as a secured creditor party under the 2017 Note and related agreements.